October 2008

My partner, Nicole Auerbach, the soul of Valorem, ensures that we live by the rule that while we take our clients and their problems very seriously, we can’t take ourselves seriously at all.  This is the sign that welcomes us to our Conference Room.  Even after several months, I smile every time I walk in the room.  I hope it brings a smile to your face as we end a tough week.  Cheers, Nicole.

Discovery.  The great black hole.  The Interim Report on the Joint Project of The American College Of Trial Lawyers Task Force On Discovery and The Institute  For The Advancement Of The American Legal System contains this nugget:

  • 64% of the respondents (member lawyers, so people who try lots of cases) say law firms’ economic models encourage more discovery than is necessary.

Shocking.

That the number is so low.

 

The November 2008 issue of Inside Counsel reports that 62% or the responding law department leaders expect their law department budgets to be reduced as a result of the economic crisis.

The pie is shrinking.  Your piece can shrink with it, or you can figure out how to get a bigger piece.   What are you doing to make sure you get the calories you need?

Last March, I wrote that unlike with every recession since World War II, we would not be able to rely on the consumer to drive the economy of this recession.  Since that post, we’ve seen home prices continue to tumble and the precipitous decline of net mortgage equity withdrawals (essentially, the amount of home equity borrowing by Americans), down from a range of $140 billion to $225 billion per quarter to a mere $9 billion in the second quarter.  Third quarter results may well approach zero.  The effect of this reduced spending on a key segment of the retail market is discussed in The Economist (thanks to my friends at What About Clients for the heads-up).

Just add some gravy to the mix, this from Bert Dohmen’s Wellington Letter:

The consumer doesn’t have the money to buy goods, the retailers can’t get loans to finance inventories and they can’t get sellers to accept the LOC’s from banks to ship the goods.  It’s a triple whammy!

What does all of this mean?  No one has a crystal ball, but more and more experts are predicting a very difficult 2009.  Some are predicting that the economic problems could persist for years.  But the bottom line really is this:  unless your firm is prepared to roll the dice on things "returning to normal" in a very short period of time, you must engage in serious "worst case" scenario planning.  Chaos creates opportunities to be sure, but those most likely to gain advantage in chaos are those most prepared for it.

Matt Homann’s Ten New Rules of Legal Marketing in the [non]billable hour is brilliant.  Here are my two favorites:

2.  Google tells me there are 337,000 "Full Service Law Firms” out there.  Which one was yours again?

7.  Having the scales of justice on your business card says you’re a lawyer — an old, stodgy, unimaginative, do-what-everyone-else-has-done-for-fifty-years lawyer.  Same is true for your yellow pages ad.

And from his follow-up post Ten Rules About Hourly Billing are these gems:

5.  When you bill by the hour, your once-in-a-lifetime flash of brilliant insight that saves your client millions of dollars has the same contribution to your bottom line as the six minutes you just spent opening the mail.

6.  Businesses succeed when their people work better.  Law firms succeed when their people work longer.  Your clients understand this — and resent you for it.

Kudos.

Check out Larry Bodine’s discussion of the ACC/Serengeti study that predicts a downturn in spending on outside law firms in 2009.  Also take a look at Hildebrandt’s Fall 2008 Special Client Advisory.  Those looking for good news or positive signs will be disheartened.  From Hildebrandt:

Unfortunately, it seems certain that a quick turnaround for the economic crisis will not be possible.  Despite the aggressive efforts of governments and central banks around the world to bolster the capital markets and to free up credit, it is apparent that it will take several months to work our way out of the current quagmire.  We believe that we are unlikely to see any significant turnaround until late 2009, at the earliest.

As I wrote yesterday, the smart money is betting on a later date. 

The Special Client Advisory also contains this insight:

If, as seems likely, across-the-board rate increases will not be possible in 2009, the hit on law firm profitability will thus be particularly severe.  Moreover, the current crisis is occurring at a time when client resistance to the level of legal fees has already been mounting.  All of this may ultimately require a re-thinking of the basic law firm economic model.

The use of the word "may" in the highlighted sentence could rank as one of the great understatements of this episode.  Having said that, my encounters with leaders of large law firms over the last several months lead me to believe that most (indeed, almost all) do not understand or appreciate the profound changes that will be required by law firms just to survive this toxic environment.

    I just wrote about how much worse the economy may get, and what it means for law firms.  I would be remiss if I didn’t offer some thoughts on what the declining economy means for clients.

   Let me begin my observations by recalling Einstein’s definition of insanity: doing the same thing over and over, and expecting different results.

  So, the first thing each client needs to do is to decide whether you are insane.  If you decide you are, good luck.  If you realize that change might be necessary, start by making two lists: (1) what do I want to accomplish; and (2) what ways exist that allow me to accomplish my objectives.

  Let’s begin by discussing List 1.  I suspect that in this environment each sane person’s list includes some variation on the idea of reducing costs.  There are probably a lot of adjectives included with that concept–materially, significantly and others along these lines.  Many would also have predictability on their lists, along with effective budgeting. 

With respect to List 2, begin with this principle:  for brainstorming to work, the only bad idea is the one not expressed.  Ideas tend to feed on one another.  Idea A might not be good, but it sparks something in someone else who comes up with Idea B, a fabulous idea that would never have seen the light of day were it not for Idea A.

On List 2, I hope people consider two things I have banked my future on: fees based on something other than time, and the use of small firms.  But not just any small firm.  There are many firms that are comprised of people who received the benefit of big firm training and have substantial experience handling the most complex matters for large clients.  Some, but certainly not all, of the lawyers that leave big firms leave on their own accord because they realize they can do more for clients when freed of the limitations inherent in big firms.  It is one of the great misconceptions that  big firms are better than small firms.  There are a lot of ex-big firm lawyers out there who equal or exceed the experience and talent of big firm lawyers, but who have so much more ability, flexibility and interest in helping clients solve their most important problems without regard to the impact any deal will have on the firm’s AmLaw 100 rank.  My friend Dan Hull refers to these boutiques as muscle boutiques.  Inasmuch as I joined several other big firm refugees to start Valorem, I believe with every cent left in my kids’ Section 529 plans that these smaller specialty firms have a special place in helping clients solve their problems.  And that clients will recognize this. 

On Wednesday, I will be part of the faculty of a program offered by Inside Counsel, Managing Litigation As A Business.  I am a big believer that litigation can and should be managed as a business, not only by inside counsel but by outside lawyers as well.  If inside counsel ever want to discuss the concepts, I’ll be happy to discuss the issues with you–no charge of course.  You can reach me here.

The end of this exercise is to take your lists and force rank each so you know what your priorities are and what steps are most likely to help you achieve the priorities.  Take the top three items on list 2 and, for each develop a detailed list of precisely what you will need to do to accomplish the item.  This third list is where the rubber hits the road.  Don’t write "identify 3 new law firms that use value pricing."  Find the three firms and then write down, "Give work to Firms A, B and C.  If you can be even more specific, do it.  "Call Jane Smith to see if she can take over the ABC matter and complete discovery for less than $40,000."

The last thing is to take your detailed to-do list and do it.

Wake up and smell the coffee.

If you run a law firm, heck, if you work at a law firm, wake up and smell the coffee.  What, exactly, do you think you’re going to do if the economy continues to head south (which I just wrote about).   If life for your clients continues to worsen, what exactly do you think you’re going to do?  Think for a minute about how clients will feel when they receive that letter telling them that you’re raising your rates.  Think how they will feel when they read about BigLaw complaining that their profits per equity partner are down 10% (but that partners are still making millions, all the while the company’s stock price is down by two-thirds).   Think about the struggle everyone at our client’s is experiencing everyday to do more with less.

Now think about what will run through each client’s mind when he or she considers how you and your firm have reacted during these troubled times.  Did you help their situation or did you hurt it?  Did you feather your own nest at the client’s expense or did you tighten your belt so your client didn’t have to tighten its belt as much?

My friend Gerry Riskin has repeatedly advised law firm leaders to discuss the strategic and managerial implications of the economic meltdown.  I hope people are lining up with Gerry and others like him to discuss the issues raised, because these issues go to the heart of most firms’ business model.  I don’t think I am wandering too far from reality to suggest that firms that are slow to reinvent themselves during these times will be in peril.  Already the early indicators are there:  the recent ACC study showing client’s taking more work inside; the warm, enthusiastic reception to ACC’s value challenge (subtitled, “kill the billable hour”); some major counter-cyclical practices not cycling up; decreasing executive compensation and other factors that blow chill winds into most law firms.

Now, more than ever, is the time for zero-based thinking.  Everything must be on the table for critical examination.

I ran across an article in the business section of this morning’s  Chicago Sun-Times that made my blood run cold.  Columnist Terry Savage was recounting how Bert Dohmen, publisher of The Wellington Letter, predicted the current credit crisis in March 2008, saying that "[t]he enormity of this problem is beyond anything we have ever seen in financial history."    In Dohmen’s September 28, 2008 edition of The Wellington Letter, he recounts how Jeffrey Immelt of GE recently said we have a " once in a hundred year" crisis in the credit markets.  Former oracle Alan Greenspan just said that we have a "once in a century" credit crisis.  And to top it off, Warren Buffett recently said on CNBC: "Last week we were at the brink of something that would have made anything that’s happened in financial history look pale." He later added, "If Congress doesn’t help us on this, heaven help us."  Nothing like all of this to start off a Monday.

The kicker?  Dohmen is quoted in the Sun Times article, saying "Most bear markets, after a major bubble has burst, decline 80-90 percent, going back to where the bubble started….So until a major index is down over 80 percent, I will not even start looking for a bottom."  There is a discussion about a "fake rally" and then the real bad news.  So when is the fake rally  going to occur?  Dohmen says he’ll make that prediction for his subscribers, but leaves the rest of us with this prediction: "But I can say the worst is still ahead over the next several years for stock market investors." 

Of course, our clients are the ones that make up the market.

 

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As I flew from Chicago to Boston this morning, I had an opportunity to read the October issue of The American Lawyer, which fortuitously arrived yesterday.  I smiled as I read a piece labled “The Going Rate: With the economy down, will fees go up?”  Readers of this blog will know I wrote about that issue a few weeks ago. I relayed a personal story about someone from a large firm telling me the firm was planning to raise rates.

AmLaw quotes Peter Haugh, managing executive of the legal group at Wachovia Corporation, as saying “Contrary to what one might think, it has become very evident that law firms are raising their rates and feeling more convinced about it.”  Feeling more convinced about it?  To quote a line my mother wore out uttering to me as a child, “good god, man, are you nuts?”

This stunning revelation comes on the heels of yesterday’s release of Association of Corporate Counsel/Serengeti Law’s study showing that in real dollar terms, corporate America is spending less on outside counsel.  I’ve regularly questioned whether lawyers have business sense, and I guess time will tell whether the strategy of throwing kerosene on the fire is the right approach to this development.  One might have thought  growing market share by actually lowering rates or looking at value fees as an option would be a better long-term strategy.  Oh well, what do I know?

So as I sit here on my flight, two pieces of advice come to mind.  For outside counsel at firms that raise rates this year, my advice is to immediately go to your phone, pick up the receiver and dial 1-8-0-0-P-S-Y-C-H-I-A-T-R-I-C-H-E-L-P and follow the instructions you receive.

For outside counsel who are shaking their heads wondering what else law firms can do to make your life difficult, my advice (at least for those who have litigation needs), is to go to your computer and type in www.valoremlaw.com.  While that last sentence is written with (hopeful) tongue in cheek, I do seriously note that firms like Valorem (my firm) and Summit Law Group and others comprised of ex-BigLaw partners who have seen the future and realize it should not include the billable hour or at least not BigLaw rates, provide a real option to help you meet your litigation needs.